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The corrective arm: the excessive deficit procedure

The Stability and Growth Pact is the cornerstone of budgetary discipline. This Regulation is part of the pact, and its aim is to clarify and speed up the excessive deficit procedure so that it acts as a genuine deterrent. It supplements the 1993 Regulation laying down the procedure to be followed in connection with excessive deficits.

ACT

Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [Official Journal L 209 of 2 August 1997] [See amending acts].

SUMMARY

The aim of this Regulation is to clarify and speed up the excessive deficit procedure provided for in Article 126 of the Treaty on the Functioning of the European Union (EU) (formerly Article 104 of the Treaty on the European Community). The emergence of excessive deficits must be prevented and rapidly corrected.

The reference value: 3 % of GDP

As set out in the Protocol on the excessive deficit procedure annexed to the Treaty on the Functioning of the EU (by the Maastricht Treaty in 1992), the reference value for government deficit is 3 % of gross domestic product (GDP). A deficit exceeding this value is considered exceptional when:

  • it results from an unusual event outside the control of the Member State concerned which has a major impact on the financial position of the government;
  • it results from a severe economic downturn (if the excess over 3 % of GDP is the result of negative annual GDP growth or a cumulative fall in production over a prolonged period of very low annual growth).

Moreover, the excess over the reference value is considered temporary if the European Commission's budget forecasts state that the deficit will fall below the reference value when the unusual circumstance or serious downturn is over.

The existence of an excessive deficit: considering all factors

The European Commission carries out an assessment, and the Council of the European Union decides whether or not there is an excessive deficit. The Commission prepares a report and must take all relevant factors into account.

The relevant factors include:

  • developments in the medium-term economic position (potential growth);
  • prevailing cyclical conditions;
  • the implementation of policies aimed at encouraging research and innovation;
  • developments in the medium-term budgetary position, particularly fiscal consolidation efforts in "good times";
  • reform of retirement pension schemes.

The European institutions are also required to give due consideration to any other factors which, in the opinion of the Member State concerned, are relevant for assessing the excess over the reference value.

The excessive deficit procedure

7. Commission Report. Within two weeks of the Commission adopting the report it draws up if a Member State does not fulfil the criteria laid down in Article 126 of the Treaty on the Functioning of the EU, the Economic and Financial Committee formulates an opinion.

The Commission takes this opinion into account and, if it considers an excessive deficit to exist, addresses an opinion to the Member State concerned. It also informs the Council.

Council Recommendation

On the basis of the Commission's opinion, the Council decides, by a qualified majority, whether an excessive deficit exists. The Council also considers any observations made by the Member State concerned.

If the Council decides that an excessive deficit exists, when it makes that decision, it issues recommendations to the Member State concerned. The Council establishes a deadline of no more than six months for effective action to be taken. The correction of the excessive deficit should be completed in the year following its identification, unless there are special circumstances. In its recommendations, the Council is to request the Member State to achieve a minimum annual improvement of at least 0.5 % of GDP as a benchmark.

If unexpected adverse economic events with major unfavourable consequences for government finances occur after the adoption of the Council's recommendations, and if the Member State concerned has acted in accordance with the recommendations, the Council may adopt revised recommendations.

Where no effective action has been taken within six months of the identification of an excessive deficit, the Council decides whether to make its recommendations public. When considering whether effective action has been taken in response to its recommendations, the Council bases its decision on the public declarations of the Member State concerned.

Formal notice and sanctions. Within two months of its decision establishing that no effective action has been taken, the Council may give notice to the Member State concerned to take measures to reduce the deficit. If effective action has been taken in compliance with a notice, and unexpected adverse economic events with major unfavourable consequences for government finances occur after the adoption of that notice, the Council may decide, on a recommendation from the Commission, to adopt a revised notice.

No later than four months after notice has been given, the Council normally decides to impose sanctions if the Member State fails to comply with the Council's decisions.

As stipulated in Article 139, paragraph 2(b) of the Treaty on the Functioning of the EU (formerly Article 122 of the Treaty on the European Community), the formal notices issued by the Council and the sanctions provided for in Article 129 of the Treaty do not apply to Member States not (yet) participating in the euro.

Abeyance of the procedure

The excessive deficit procedure may be held in abeyance:

  • if the Member State concerned acts in compliance with the recommendations made by the Council;
  • if the participating Member State concerned acts in compliance with the notices issued by the Council.

The period during which the procedure is held in abeyance is not included in the periods relating to the giving of notice or to the imposition of sanctions.

Corrective action

The Council sets a deadline for corrective action to be taken by the Member State. This corrective action must comply with the Council's recommendations and its sanctions. Upon the expiry of this deadline, the Commission gives the Council its opinion on the corrective measures taken by the Member State concerned. The Commission's opinion is based on the premise that these measures have been fully implemented and that economic developments are in line with forecasts.

In order to examine a participating Member State's adjustment efforts, the Council may ask the Member State to submit reports in accordance with a specific timetable:

  • if action by that participating Member State is not being implemented or, in the Council's view, is proving to be inadequate;
  • if actual data indicate that an excessive deficit has not been corrected by that participating Member State within the time limits specified in the recommendations.

Sanctions

Sanctions resulting from a procedure for excessive deficit first take the form of a non-interest-bearing deposit with the EU. The amount of this deposit comprises:

  • a fixed component equal to 0.2 % of GDP;
  • a variable component equal to one tenth of the difference between the deficit as a percentage of GDP in the year in which the deficit was deemed to be excessive and the reference value of 3 % of GDP.

Each following year, the Council may decide to intensify sanctions by requiring an additional deposit. This will be equal to one tenth of the difference between the deficit as a percentage of GDP in the preceding year and the reference value of 3 % of GDP.

Deposits may not exceed the upper limit of 0.5 % of GDP per year.

As a rule, a deposit is converted into a fine if, in the Council's opinion, the excessive deficit has not been corrected after two years.

The Council may decide to abrogate some or all of the sanctions, depending on the significance of the progress made by the participating Member State concerned in correcting the excessive deficit.

The Council will abrogate all outstanding sanctions if the decision on the existence of an excessive deficit is repealed. Any fines already imposed will not be reimbursed to the participating Member State concerned.

Both the interest on the deposits lodged with the Commission and the yield from any fines will be distributed among Member States without an excessive deficit, in proportion to their share of the total gross national product (GNP) of the eligible Member States.

Context

The aim of the Stability and Growth Pact is to prevent excessive budget deficits emerging in the euro zone after the beginning of the third phase of Economic and Monetary Union (EMU), which started on 1 January 1999.

As the Treaty only sets out quantitative criteria for adopting the single currency and does not specify a budgetary policy to be implemented after the introduction of the euro, Member States judged it necessary to adopt the Stability and Growth Pact. It is therefore in keeping with the principles set out in the Treaty and extends its provisions.

The Pact is intended to ensure sound management of public finances in the euro zone in order to prevent a situation arising in which one Member State's lax budgetary policy penalises the other Member States through interest rates and undermines confidence in the economic stability of the euro zone. It is designed to ensure the sustained and lasting convergence of the economies of Member States belonging to the euro zone.

Moreover, this Regulation was the subject of an initial revision in June 2005. A second recast is currently underway. The Proposal for the new regulation should be adopted by the European Parliament and the Council of the EU towards the end of 2011.

REFERENCES

ActEntry into forceDeadline for transposition in the Member StatesOfficial Journal

Regulation (EC) No 1467/97

1.1.1999

-

OJ L 209, 2.8.1997

Amending act(s)Entry into forceDeadline for transposition in the Member StatesOfficial Journal

Regulation (EC) No 1056/2005

27.7.2005

-

OJ L 174, 7.7.2005

Last updated: 02.02.2011

See also

Further information is available on the website of the Directorate-General for Economic and Financial Affairs:

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